Amazon income drops as Kindle Fire burns margins

Online retailer Amazon announced on Tuesday lower than expected third quarter earnings and guided for potential losses in the fourth quarter, as its low-margin strategy with the Kindle Fire could pose a threat to future profits.

The company revealed sales for the recent September quarter grew 44 percent year over year to $10.88 billion, but it was unable to convert the growth into earnings. Operating income shrank from $268 million in third quarter 2010 to just $79 million. According to Investor's Business Daily, Amazon's 14 cents a share earnings missed average analyst estimates by 10 cents.

Guidance for the fourth quarter predicted a broad range for operating income — a lower limit of a loss of $200 million and an upper limit of $250 million in profits. Such a loss would represent a 142 percent decline year over year for the retailer. Net sales for next quarter are expected to be between $16.45 billion and $18.65 billion, with growth between 27 percent and 44 percent

The earnings miss shook investors' faith in the company last Tuesday. Shares of the company slid $10.46, or 4.4 percent, in the day's trading and plummeted $28.26 to $198.89 during after-hours trading.

Founder and CEO Jeff Bezos also announced in the earnings press release that pre-orders for the Kindle Fire tablet have been better than expected, with the company "increasing capacity and building millions more" units than initially planned.

Though Amazon CFO Thomas Szkutak dodged analyst questions of whether the Kindle is affecting margins, he did hint at a low-margin strategy during a Q&A session with analysts to discuss the results, as covered bySeeking Alpha.

"We think about the economics of the Kindle business, we think about the totality," he said. "We think of the lifetime value of those devices. So we're not just thinking about the economics of the device and the accessories. We think about the content.

"We are selling quite a bit of Special Offers devices which includes ads. We're thinking about the advertisement and those Special Offers and those lifetime value. So those are the things certainly that are impacting, as well as investments in other areas impacting our Q4 guidance. So we feel very good about where we are right now and the opportunities that we have in front of us."

Amazon announced the aggressively-priced $199 Kindle Fire in late September. The 7-inch multitouch tablet goes on sale on Nov. 15.

J.P. Morgan analyst Douglas Anmuth said Kindle Fire production has risen sharply as of late. He expects Amazon to sell 5 million Kindle Fire units in the fourth quarter.

But, some analysts have questioned whether Amazon's strategy will pay off in the long-term. Piper Jaffray's Gene Munster estimates that the company will lose $50 per Kindle Fire sale. J.P. Morgan's Mark Moskowitz said he's "not impressed" with the device, adding that the Fire's low price could actually deter customers.

For his part, Apple CEO Tim Cook responded to the notion that the Kindle Fire represents a threat to iPad sales during the company's most recent quarterly earnings conference call.

"We've seen several competitors come to market to try to compete with the iPad over time. Some had different form factors, different price points. I think it's reasonable to say that none of these have gained any traction thus far."

According to recent projections from Gartner, Apple will hold on to a dominant 73.4 percent of the tablet market in 2011. The company sold a record 11.12 million iPads in the September quarter, up 166 percent from a year ago.

Consumers are not stupid. You get what you pay for. If you want good food, you pay more. If you want a good education, you pay more. If you want a nice house, you pay more. If you want good technology, you pay more. If you want a $25 netbook, then you can live in poverty in India. Part of bettering yourself is to strive for something better. If you shop at Walmart your whole life, then you will have nothing better to offer your children when you die than Walmart items.

First of all, I love my iPad2. Coupled with MobileMe and now iCloud, it allows me to manage appointments, enter contacts, take notes, etc. Sync them with the iPhone and iMac. and besides that Filemaker Go allows me to work with my FM11 database resident on my iMac. I'm in business.

Allow me to gloat, second. When the Kindle Fire had the center of attention pre-iPhone 4s for all about 2 seconds, we had to hear from all of the press and all of the Kindle Fire fanatics that the Kindle Fire would DESTROY the iPad, that the Kindle Fire set the price point for tablets in the future, that Jeff Bezos would be the next Steve Jobs, blah, blah, blah.

Now, gee, no shit, Amazon is following the same failed strategy as the netbook. Flood the market with OK quality product at a low price. Watch your margins shrink.

Oh wait, though, they would make it back on content sales. But yet again, you have another dumbfuck company looking at the wrong target. IT'S NOT CONTENT THAT MAKES APPLE RICH, IT'S THE HARDWARE, DUMMIES!!! When will these companies learn.

Consumers are not stupid. You get what you pay for. If you want good food, you pay more. If you want a good education, you pay more. If you want a nice house, you pay more. If you want good technology, you pay more.

Not "good", but "better". i.e. If you want a better house, you pay more. If you want better technology, you pay more... etc.

Just because I don't like in a mansion and drive a Ferrari doesn't mean my house and car aren't any good.

There are already going to be people in society that have the means and the will to pay for "better" or even "the best", but everyone else is going to settle for "good enough".

Quote:

Originally Posted by bdkennedy1

If you shop at Walmart your whole life, then you will have nothing better to offer your children when you die than Walmart items.

I would hope when I die my children would know of love, kindness, generosity and humility and that the people they meet in life cannot be simply defined by the color of their skin, the number of 0's on their bank balance or where they decide to do their bloody shopping.

Developing a new tablet like this was a necessary evil for amazon. With electronic books being the next big thing, amazon is fighting for its life. By altering android they also help create their own ecosystem somewhat isolated from google. Only problem here is they need to keep developing and innovating with their core software instead of the frills around the edges.

Consumers are not stupid. You get what you pay for. If you want good food, you pay more. If you want a good education, you pay more. If you want a nice house, you pay more. If you want good technology, you pay more. If you want a $25 netbook, then you can live in poverty in India. Part of bettering yourself is to strive for something better. If you shop at Walmart your whole life, then you will have nothing better to offer your children when you die than Walmart items.

So when Samsung release their next tablet that will be more expensive than Apples, you will be ditching your iPad. Good to see.

Ok so this fire device, it doesn't have a cell unit built in and from what it looks like to me it is a bit small for books. I mean the color screen and the size of that screen isn't as nice to read a book on compared to the standard liquid paper model. I wonder if they think they have a cheaper version of the iPad that in my opinion "you get what you pay for". I have seen other people in this posting say the same thing. I guess we will have to wait and see. Oh and one more thing. I went to amazon and looked at this device. The specs are vague. Really they don't explain the specs very well.

...Oh wait, though, they would make it back on content sales. But yet again, you have another dumbfuck company looking at the wrong target. IT'S NOT CONTENT THAT MAKES APPLE RICH, IT'S THE HARDWARE, DUMMIES!!! When will these companies learn.

Steve (RIP) said it best, "They just don't get it."

Hardware without the content is USELESS. Apple created the ecosystem to tie Mac, iPhone, and iPad together. Likewise, the reverse is also true. You can have the best content but subpar hardware won't get you anywhere. Amazon is ALMOST right. It has the contents, but it needs to improve on the hardware to compete.